US stocks are likely to rise about 10 percent next year from Friday’s close, led by gains in banks and technology companies as the market recovers from its August rout, Wall Street strategists told Barron’s.
A strong US dollar, tumbling commodity prices and global economic stagnation is likely to constrain earnings growth, strategists surveyed in Barron’s “Outlook 2016” story in yesterday’s issue said.
Respondents were bearish on utilities, metals and mining shares, while they split evenly on their outlooks for energy stocks. Their favorite industries included technology and financials, the survey shows.
Stocks have slid this month as the commodity selloff dims the prospects for a global recovery and revives deflation concerns. The benchmark Standard & Poor’s 500 Index dropped 3.8 percent this week. It is up 7.8 percent from a 10-month low in August.
Goldman Sachs Group Inc chief US equity strategist David Kostin told Barron’s the market is underestimating the number of rate hikes next year.
The US Federal Reserve is expected to end its seven-year crisis stance with an interest rate increase next week.
The US Fed’s policy body, the US Federal Open Market Committee, is scheduled to meet tomorrow and Wednesday to weigh raising the fed funds rate, a short-term peg for interbank lending which influences rates throughout the financial system, from 0 to 0.25 percent to an expected 0.25 to 0.50 percent.
Most bets are that the US Fed will increase the benchmark federal funds rate for the first time in nearly a decade, signaling confidence in US economic growth even as the rest of the world economy sags.
Goldman predicts four increases next year, bringing the US Fed’s interest-rate target for overnight loans between banks to 1.25 percent to 1.5 percent.
Federated Investors Inc chief investment officer Stephen Auth told Barron’s that the fed funds rate are likely to climb to 1 percent by the end of next year, and the US Fed would eventually stop at 3 percent.
Higher interest rates and slow economic growth is to offset a rise in earnings, Kostin said. His stock picks for next year include Visa Inc and Google parent Alphabet Inc.
A stronger US dollar is one of the biggest risks facing the market next year, JPMorgan Chase and Co chief US equity strategist Dubravko Lakos-Bujas told Barron’s.
A 5 percent to 6 percent change in the US dollar’s trade-weighted average price is roughly equal to a 3 percent change in earnings per share over the next 12 months, he said.
Banks are cheap compared with other sectors and are a good hedge against the risk that the US Fed would raise rates more rapidly than predicted, Lakos-Bujas said.
Additional reporting by AFP
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